Renewable energy is on the rise, and rooftop space is needed to make use of solar energy systems. The regulatory climate has improved and development costs have dropped dramatically over the past few years, which has led to a significant increase of commercial building owners as well as energy developers looking for ways that they can access and utilize solar energy resources.
This can be done in many ways. The most traditional model is for property owners to own a rooftop solar photovoltaic (“PV”) system, pay for the installation, and use the energy produced to offset its utility costs. This requires a large upfront investment.
This is why rooftop leasing has become increasingly popular. This model allows a third-party to lease the roof from the owner of a commercial building, install the solar panels, and then rent the roof to a local off-taker, usually a utility company. Aside from the obvious benefits of being more environmentally responsible and having a higher corporate social responsibility, leasing creates additional revenue streams for the property owner over a 20-plus year period by using underutilized roof spaces. Many developers are able to provide discounted electricity for commercial buildings through a program called a community program or a power purchase agreement (PPA), which can help reduce energy costs.
Rooftop solar leasing can be a win-win situation for both the parties. Before you sign up, there are many things to think about when signing up for this type lease. Here are some additional considerations that commercial building owners and developers should consider in addition to traditional lease provisions. These factors are not limited to rooftop leases. Many of these considerations also apply to leasing large parking lots, underutilized open spaces, and carports.
Roof Suitability
- Is the roof suitable as a roof for a PV System. Roof age, size, if the roof is crowded, whether it is shaded, and whether there are any HVAC or other equipment.
- How long does the roof inspection take?
- How do you prevent voiding the building’s roof warranty?
Lease Term and Rent
- What is the initial lease term. Terms can range from 15-25 years.
- What are the options for lease renewal after the initial term?
- What does the rent payment look and feel like? Is it fixed or variable? Is it calculated on the following: (i.e. the size of the rooftop used; (ii. the wattage generated; (iii. a percentage the tenant receives in revenues; or (iv). Another basis? Is there an annual escalator?
Construction, Operation, Maintenance and Repair of the PV System
- What licenses are required for construction? Examples of licenses include construction, ground, ladder, and other types.
- Is it required that the building owner approve the plans and specifications, and sign off on any alterations, repairs, or replacements?
- How and when can a developer access the roof to install, clean and maintain the PV system?
- Is it a concern for roof and building security?
- How can the parties use a roof to not interfere with the operation of the PV systems?
- What are building owner’s obligations regarding interference with availability of sunlight?
- What happens if your roof needs repair or replacement?
- What happens if the structure needs to be repaired?
- Who is the owner of the PV system during the lease period?
- What types must be kept for liability insurance? Who pays for the increase in insurance premiums
- Who pays for real estate tax increases?
- How can you manage hazardous materials and comply with environmental regulations?
- Who owns the environment attributes? These include carbon trading credits and renewable credits, tax credits, accelerated deduction, etc.?
Lease Termination
- Can the building owner acquire the PV system once the lease expires?
- How can you deal with the removal of the PV system from roof and the decommissioning assurances?
Every rooftop lease is different. These leases can be tailored to fit each individual situation. Each party will be able to position the project for maximum success by addressing these issues in the lease.
You should ensure your interests are properly protected and that the project is set up for success if you own a commercial building, landowner, or are an energy developer looking to bring your product to market.
Unless otherwise stated, opinions and conclusions expressed in this blog post are solely the author’s. The information in this blog is general and not intended to be interpreted as legal advice. The author has provided these links for informational purposes only. He does not adopt or incorporate them. This communication does not contain any federal tax advice. The recipient cannot use the information to avoid penalties that may be imposed by the IRS. If you would like written advice in accordance with IRS rules that can be relied upon to avoid IRS penalties, please contact the author.
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